Cold turkey time, and Big Man Erdogan must take some blame
We are now knee deep in that much dreaded withdrawal phase that all addicts go through, and as someone in the throes of my own personal battle to fully get over sugar, it’s a bitter period. While the focus is an emerging-market crisis, one where all the sins of the developing world are held aloft as what not to do, in reality everything is being repriced and even those unicorns in Silicon Valley are not immune. For the past decade, the value of all assets has been superficially boosted by the markets’ addiction to the sugary highs of the US Federal Reserve’s cheap-dollar policy. It’s a policy, it can be argued, that saved the world from a much deeper economic crisis a decade ago when the financial crisis in the US banking system threatened the future of capitalism itself. There’s still much argument over its long-term merits, but what’s clear is that it cushioned the fallout from the 2008 global recession.
Money, and more specifically dollars, flowed and from that liquidity the value of virtually all asset classes was well supported. But as far back as 2013 we were warned that the era of cheap money would come to an end, and that the dollar would strengthen as the US reigned in its stimulus injections and started to raise rates. The value of any currency is set by its interest rate.
For the past five years, market anxieties over this shift in policy and just what it would mean for valuations was eased by reassurances that the normalisation process wouldn’t be aggressive and that it would all be done gradually and responsibly.
This year, one gets the feeling we are now finally dealing with the reality that the sugary highs are no more. These are the withdrawal symptoms and there aren’t any nicotine patches. They come slap bang in the middle of heightened geopolitical tensions stoked by Donald Trump, who needs them to distract attention from his own mess at home.
As money is looking to safe-haven assets instead of high-yielding ones, betting against the basket of emerging-market economies is a winner in New York and London. Like sheep, market participants have piled into the trade and unfortunately, or rather fortunately, the rand is the bellwether of that sentiment. (What’s fortunate about the fact that the rand is at the centre of EM trade is that when it weakens, as it has over the past few weeks, our imports generally fall and our exports rise, helping reduce one of the deficits that ratings agencies so often fret about.)
That’s our fate whenever there’s a sell-off or buy risk story in markets, even though the headlines aren’t SA specific but rather centred on Turkey this time around.
Reserve Bank governor Lesetja Kganyago captures the EM story best with his analogy of a predator surveying the savannah. “In the African bush, predators look for prey. They don’t know which animal to pounce on until one member of the herd deviates — and that’s the one that gets pounced on.”
Hunters have a taste for EMs whose central banks suffer a lack of credibility. Turkey and Argentina certainly stand out. Politically, Turkey has long been a worrying story, with an attempted coup d’etat some two years ago followed by mass incarceration of President Recep Tayyip Erdogan’s opponents.
Markets are not punishing the country’s bad politics but the president’s rather unorthodox economic policies. Under this pressure, the “Big Man” persona that he has built up over 15 years of rule looks rather small. Markets are raining on his parade.
Luckily, it’s a test that SA passes for now. But when one hears of unclear stimulus plans for the economy that for all intents and purposes is in austerity gear, one has to wonder how bad the judgment will be when markets zero in on our fiscal plans, or lack thereof.
@ronderby derbyr@sundaytimes.co.za
Betting against emerging markets is a winner in New York, London